This Sunday was:
1. May Day
2. The day Hitler’s death was announced back in 1945
3. When millions of Americans finally put to rest a decade of anger and fear from Osama bin Laden’s continued evasion of U.S. forces
Bin Laden's death will surely have far-reaching ramifications, including politics, the prevention of terrorism, and closure for the families of 9/11 victims—but you may be wondering about the connection between his assassination and the stock market rising all around the world, from France to Japan to Germany to the U.S., extending the longest rally for the S&P since January.
Learning From the Past
Traditionally, current events affect financial markets because investors are people too, meaning that they’re impacted by the same psychology as we are. They buy more things when they’re feeling relieved and clamp down when they’re feeling threatened. But studies have shown that non-financial world events are often mere blips on the record; even Pearl Harbor, Kennedy’s assassination, and other historic turning points have had only limited short-term effects on the stock market. It’s the larger trends following those events that will have the biggest impact: whether bin Laden’s death will actually limit worldwide terrorism, whether it could spark retaliatory attacks, and other long-term concerns.
How Bin Laden’s Death Affects the Markets
Yesterday, the S&P 500 surged in the morning. By the afternoon, however, those gains already started to fall apart, showing us that the effects of even big world events don't last forever. Similarly, the cost of oil fell by almost 3% yesterday morning (because bin Laden and his followers believed in attacking oil production and distribution, which raises the price of oil, in order to hurt the U.S. and Europe; once he was out of the picture, prices dropped). By early yesterday afternoon, oil prices had already risen after the bin Laden-related dip. The moral of the story for many investors is that, though these short-term shifts feel very real to us while they're happening, it pays to keep a bird's eye view.
What This Means for You
The bottom line: World events happen. Some are good, some are bad, but many of them don’t have a lasting impact on the economy. If you see the stock market surge (or plummet) on certain news, think twice before changing the way you invest as a result. After all, investing should be a long-term process.
If you need to access your money within five years or fewer, keep it somewhere safer than in the market (like in a high-yield savings account or CD). But, if you’re investing for retirement, time will help mediate the ups and downs that the market is sure to take between now and then.
For more tips on how to keep your cool through tumultuous times, read this.